TMI Blog2005 (10) TMI 434X X X X Extracts X X X X X X X X Extracts X X X X ..... mputer Mathematics. Shri Peter Morris also did graduation in Electronics Engineering. In the jobs they did after their education, all of them gained experience in implementation, designing, development of software which prompted them to set up in October, 1990, their own software business styled as Login Systems Innovations Pvt. Ltd. But unable to make satisfactory progress in the business, they allowed their company to be taken over by this assessee- company. During the short period of its existence, LSI did some preliminary work in developing some technical knowledge basis of software in Banking Sector. It earned some income by way of consultancy and development of customized software to Banks. The turnover during the year 1993 was Rs. 28 lakhs. 3. Before the formal take over of LSI by the appellant-company with effect from 1-4-1994, the four directors of LSI entered into separate agreements with the assessee on 15-10-1993. The following were the important terms of the agreement : "1. This agreement shall came into force on 15th October, 1993, for a period of 5 years with respect of the first party. 2. The consideration payable to the first party for the restrictive coven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic software for mutual funds called "Fund Manager". ( c )The restrictive covenant fees paid has to be analysed in conjunction with the taking over of business of the company in which these four professionals were promoters. The restrictive covenant fees was paid for the purpose of availing exclusive rights of the services of these professionals for a period of 5 years from 15-8-1993. ( d )The payment was made to avail exclusive rights to the service of the assessee-company for a period of 5 years and to ward off competition and to ensure continuous association and services of these four professionals for the business interest of the company. Therefore, this payment is distinctly in the nature of capital expenditure. 5. The assessee cited the following case laws in support of its contention that the expenditure of Rs. 84 lakhs incurred was revenue in nature. ( i ) CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.). ( ii ) Champion Engg. Works Ltd. v. CIT [1971] 81 ITR 273 (Bom.) ( iii ) CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC) ( iv ) CIT v. Travencore Sugars Chemicals Ltd. [1973] 88 ITR 1 (SC) ( v ) Assam Bengal Cement Co. Ltd. v. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal before the Tribunal. 9. The Learned Departmental Representative firstly strongly placed reliance on the order of the Assessing Officer. Attention of the Bench was drawn at Para-2 of Page-2 of the assessment order. It was further submitted that the assessee started its business activity now and for starting a new business any expenditure incurred on acquiring the assets or knowledge has to be treated as expenditure as capital in nature. Therefore, it was submitted that the Assessing Officer was correct in treating the expenditure incurred by assessee as capital in nature. Reliance was placed on the decision relied upon by the Assessing Officer in Blaze Central (P.) Ltd. s case ( supra ) and Hindustan Pilkington GlassWorks case ( supra ). Regarding case laws relied upon by the Learned Counsel for the assessee which was considered by the Learned CIT (Appeals) was stated to be distinguishable on the facts of the present case. It was also added that whole of the amount i.e., Rs. 90 lakhs [Rs. 6 lakhs (+) Rs. 84 lakhs] were spent by the assessee for buying the company, therefore, the same was capital in nature. It was also submitted that it was a device on the part of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was revenue in nature. Further reliance was placed on the various case laws considered by the Learned CIT (Appeals) and on the decision reported in 232 ITR 944. It was further added that in this case SLP filed by the Department have been dismissed by the Supreme Court. 10. We have heard rival submissions and considered them carefully. We have also considered the orders of the authority below and various case laws considered by both the lower authorities. After considering the submissions, case laws and orders of the authorities below, we find that the Learned CIT (Appeals) was correct in holding that the payment of Rs. 84 lakhs was in revenue account. We, however, noted that the Learned CIT (Appeals) has examined the issue from both angle that whether the nature of payment is capital in nature or in revenue in nature. The Learned CIT (Appeals) has recorded observations in his order somewhere that this is a case of capital vs. revenue and thereafter he examined the issue and found that the payment made by the assessee was of revenue in nature. In para 7, the Learned CIT (Appeals) has observed that it is really difficult to analyze the plethora of cases cited on both sides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion and lots of misapprehensions about the scope of impact of the agreements entered into by the assessee-company with the four persons and the actual role played by them in development of the assessee s software business, Shri Sanjay Kumar, Managing Director of the assessee-company personally appeared in the course of hearing of this appeal and clarified many points both orally and in writing. Shri M.M. Diwan, former Director of the taken-over company, also appeared and gave further clarifications. The following facts emerged from these discussions and clarifications. The facts from the arguments and submissions of Shri Sanjay Kumar, Managing Director and Shri M.M. Diwan, former Director of the taken-over company were discussed by the Learned CIT (Appeals) in forgoing paras at Pages 7 and 8 which can be seen hereunder : "The appellant company, originally incorporated as Synergy Credit Corporation Ltd., was in the business of finance. With effect from 1-4-1993, relevant to the assessment year 1994-95, it purchased the business of computer software along with certain assets and liabilities belonging to the Login Systems Innovations Pvt. Ltd. (LSI) for a sum of Rs. 6 lakhs. The fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1993. While in the period 1994-1998, Synergy Log-in Systems Ltd., turnover has grown to Rs. 7.8 crores. 5. Contrary to what is stated in the assessment order, the software business has grown not only because of the expertise of 4 recipients in banking software, in fact 2 of the 3 products viz. Fund Manager and Synergy are in areas which the four had no prior expertise. In the product Synergy it was the principal promoter s expertise in finance that enabled the product to be developed. The product development effort involved not just 4 recipients but also up to 50 other financial and technical team members. A total of over 175 man years have been spent till date of which only 25 man years are attributable to recipients. 6. Contrary to what is stated in the assessment order, the existing products FISTS and FESTRA were not sophisticated generalized solutions but were more in the nature of products. The code was transferred from client to client with numerous changes. It was only after acquisition that a large team of professionals were assembled and the newer products were developed. To summarise, on no grounds was any benefit of enduring nature obtained by entering into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are considered to be unconnected events, any advantage derived by the assessee out of their services cannot be linked up with restrictive covenant agreements. Hence, the amounts paid by the assessee as a result of the agreements cannot be treated as capital expenditure on the ground that the company derived any enduring advantage out of such services. 14. Written note was filed before the learned CIT (Appeals) wherein it was mentioned as under : "There is no link between the acquisition of the business of M/s. Log-in System and the employment of the four technical professionals and the payment of non-compete fee. The appellant company need not have taken over the four professionals while acquiring the assets and liabilities of M/s. Log-in Systems. However, since the four persons were already renowned in the field of computer software, the appellant company felt that it would be useful to employ the four professionals in their company and with a view to ensure that the four professionals do not leave the company and also do not compete with the business of the company a sum of Rs. 21,00,000 lakhs for each professional was paid as non-compete fee." 15. After considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Learned CIT (Appeals). To avoid brevity, we would like to incorporate all those paras in our order hereunder : "18. I am not impressed with the arguments advanced by the Assessing Officer as to the applicability of the case laws cited by him in support of his finding that the expenditure of Rs. 84 lakhs in this case was capital in nature. In the cases of Blaze and Centre (P.) Ltd. ( 120 ITR 33) and Hindustan Pilkington Glass Works ( 139 ITR 581), amounts were paid by the respective assessee to ward off competition by preventing the other parties in the same line of business from carrying on their businesses. 19. In the case of Travencore Sugars Chemicals Ltd. ( 88 ITR 1 ), the Supreme Court held that any expenditure incurred to acquire profit making apparatus of business assets should be allowed as a revenue expenditure. In fact this decision, relied upon by the Assessing Officer is in favour of the assessee. 20. In the case of Jalan Trading Co. ( 155 ITR 536 ), the expenditure in question was made for the initial outlay for the acquisition of a capital asset and hence was held to be capital expenditure by the Supreme Court. Such is not the case here. 21. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." 24. The distinctive facts of the appellant s case should be borne in mind. The sum of Rs. 6 lakhs paid by the assessee for acquiring the business of Synergy Log-in Innovations Systems was not claimed as revenue expenditure. What was claimed as revenue expenditure was the amounts paid to the four experts preventing them from working for anybody else as per the terms of the restrictive covenant agreements entered into with them. The agreements did not oblige them to work in the appellant company. They were agreements negative in character. They did not bring into existence any asset of enduring benefit to the assessee in the capital field. It was an expenditure laid out wholly and exclusively for the purpose of earning profit in the assessee s business and hence can be characterised only as revenue expenditure. The total income determined by the Assessing Officer is, therefore, reduced by Rs. 84,00,000." 16. As stated above, the Learned CIT (Appeals) has discussed the decisions relied upon by the Assessing Officer as well as the Learned Counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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